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SEC charges Caribbean cricket sponsor Allen Stanford with USD8bn fraud

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The Securities and Exchange Commission has charged Robert Allen Stanford, the Texan billionaire who has come to prominence worldwide as a sponsor o

The Securities and Exchange Commission has charged Robert Allen Stanford, the Texan billionaire who has come to prominence worldwide as a sponsor of Caribbean cricket, and three of his companies for allegedly orchestrating a fraudulent multi-billion dollar investment scheme based on an $8 billion certificates of deposit programme.

Stanford’s companies include Antigua-based Stanford International Bank, Houston-based broker-dealer and investment adviser Stanford Group Company, and investment adviser Stanford Capital Management.

The SEC has also charged Stanford International Bank chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group, in the enforcement action.

Following the SEC’s request for emergency relief for the benefit of defrauded investors, US district judge Reed O’Connor has entered a temporary restraining order, frozen the defendants’ assets, and appointed a receiver to marshal those assets.

“As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” says Linda Chatman Thomsen, the outgoing director of the SEC’s division of enforcement. “We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors.”

Rose Romero, regional director of the SEC’s Fort Worth regional office, adds: “We are alleging a fraud of shocking magnitude that has spread its tentacles throughout the world.”

The SEC’s complaint, filed in federal court in Dallas, alleges that acting through a network of Stanford Group Company financial advisers, Stanford International Bank sold approximately USD8bn of so-called certificates of deposit to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through the bank’s unique investment strategy, which purportedly allowed it to achieve double-digit returns on its investments for the past 15 years.

According to the SEC’s complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in liquid financial instruments, monitors the portfolio through a team of 20-plus analysts, and is subject to yearly audits by Antiguan regulators.

Recently, as the market absorbed the news of Bernard Madoff’s massive Ponzi scheme, Stanford International Bank attempted to calm its own investors by claiming the bank had no “direct or indirect” exposure to the Madoff scheme.

According to the SEC’s complaint, Stanford International Bank is operated by a close circle of Stanford’s family and friends. Its investment committee, responsible for the management of the bank’s multi-billion-dollar portfolio of assets, is comprised of Stanford, his father who resides in Mexia, Texas, another Mexia resident with business experience in cattle ranching and car sales, Pendergest-Holt, who prior to joining Stanford Financial Group had no financial services or securities industry experience, and Davis, who was Stanford’s college roommate.

The SEC also alleges an additional scheme relating to USD1.2bn in sales by Stanford Group Company advisers of a proprietary mutual fund wrap programme, known as Stanford Allocation Strategy, by using materially false historical performance data.

According to the complaint, the false data helped the programme grow from less than USD10m in 2004 to more than USD1bn, generating fees for Stanford Group Company (and ultimately Stanford) of approximately USD25m in 2007 and 2008. The fraudulent performance was used to recruit registered investment advisers with significant books of business, who were then heavily incentivised to reallocate their clients’ assets to Stanford International Bank’s CD program.

The SEC’s complaint charges violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act, and registration provisions of the Investment Company Act.

In addition to emergency and interim relief that has been obtained, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the relevant provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

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